In Praise of Active Portfolio Management

As you know if you’re a regular reader of Controlled Greed, I’m managing my own portfolio. The stocks I report buying on this blog are spread across my regular brokerage account and two retirement accounts. It’s the majority of my liquid net worth and not some theoretical model portfolio, or some side money that doesn’t really impact my finances.

I do this because I’m confident I can match or beat the S&P 500 over the long term. What is less certain, much less, is if I can perform at the benchmark of inflation plus 10%.

Why do it then? Because I find value investing intellectually challenging, rewarding in a variety of ways, and, well, a lot of fun. (I think having fun is incredibly important, BTW.)

Tom Stevenson writes in the Daily Telegraph and argues for active fund management:

One reason is that active investors tend to do well when there is a big difference between the returns of the best-performing and the worst-performing stocks. Over the past 20 years there have been two periods when there has been a big gap between the market’s winners and its losers – during the 1990 recession and again during the latter stages of the tech stock boom. In both cases, the best fund managers shot the lights out. The good news is that the difference is as high as it has been for 10 years and so, therefore, are the rewards for getting it right.

If there really is such as thing as stock-picking skill, then it’s likely to be most obvious when the benefits of picking winners are greatest. During the period between 2003 and 2007, although markets rose steadily, there wasn’t so much difference between the best- and worst-performing stocks and the difference between the tracker fund and the star stock-picker was far less clear.

Read the whole thing.